Time Out

The Patriots earned their money when settling the Super Bowl challenge thanks to Adam Vinatieris kick through the goal posts. Just before that kick, the Carolina Panthers called time-out to unnerve Vinatieri and Kinchen, the stand in center. On Thursday, January 29, 2004, Greenspan and company suggested they might kick up short-term interest rates. Hinting a time out for interest rates unnerved investors.

Interest rate moves have subtle effects on income for many. Our family benefits from the presence of our childrens great grandmother, who begins her 91st year, likes football "Oh, that poor Drew Bledsoe.", but dislikes current interest rates. Clearly, her perspective includes long-term opinions on history, mores, and the economy. That "Jimmy Carter was the best President. CDs cerfificates of deposit were 14% and 16% back then. Now theyre 1% and 2%...", and then a few words about those Republicans. I try explaining the inflation quotient, but Nana just shakes her head and walks away. I just wanted to say, "Like it or not, low interest rates benefit an economy; high interest rates undermine economic growth".

Since 1790, the long-term 30 year interest rate has averaged about 5% with eight years when it exceeded 11% a number of those years when Jimmy Carter served as President; please dont tell Nana.. The current Fed Funds rate sits at 1%, a forty year low. Now, the Federal Reserve Bank Fed. quietly implies that interest rates may creep up.

"I guess I should warn you, if I turn out to be particularly clear, youve probably misunderstood what Ive said" - Alan Greenspan Speech to the Economic Club of New York, 1988

This news pounded Wall Street stock and bond traders harder than the Patriots defensive line. Each index declined more than 1.3% , the 10-year Treasury note shot up sharply to 4.20%, and the dollar moved up against the Euro. What made this news unsettling Back in August 2003, the Federal Open Market Committee FOMC said, "The committee believes that policy accommodation can be maintained for a considerable period". Six months later, the FOMC chooses to be "patient" about interest rate moves.

Most economists believe the Fed will not adjust rates upward until 2005 of course most sports analysts did not believe the Partriots would win the Super Bowl.

These factors seem to effect future Fed action:

Employment data showing strong job growth

Job Growth means an improving economy

Improving economy means inflationary pressures

Inflation prompts Fed action

Stock Market "exuberance" provokes Fed action

Mortgage rates and Treasury rates may linger around current rates due to this Fed hike suggestion

What does it mean Well, its like watching Adam Vinatieri preparing a field goal kick with a tie game and 9 seconds left on the clock. NO, its not that tense! Interest rate moves acknowledge the Feds role when managing the economy, and consensus views acknowledge that current rates have found their forty year lows. Essentially, exuberance within the housing markets and the equity markets will find "patience" more healthy than "irrational exuberance" as the Fed warns.

"The Fact that our economical models at The Fed, the best in the world, have been wrong for fourteen straight quarters, does not mean they will not be right in the fifteenth quarter" - Alan Greenspan

Stay tuned, and be patient. A "time out" serves good economic purpose.